Exclusive Distribution Agreement

EXCLUSIVE DISTRIBUTION AGREEMENT


This Distribution Agreement ("Agreement") is entered into as of May 8, 2001 between Phoenix Semiconductor, Inc. an Arizona corporation with its principal place of business located at 1706 West 10th Place, Tempe, AZ 85281, ("Supplier") and National Scientific Corporation, a Texas corporation with its principal place of business located at 4455 East Camelback Road, Phoenix, AZ. ("Distributor").


BACKGROUND


The Supplier manufactures certain "Thyristor" and "Schottky" wafer related products (as more fully defined below, the "Products"), and as described on Exhibit A, attached.


The Distributor wishes to purchase up to 100% of the Supplier's production of the Products and to distribute and sell the Product to retailers, wholesalers and other customers under the name of the Distributor.


The Distributor wishes to obtain from the Supplier, and the Supplier is willing to grant to the Distributor, the exclusive right to distribute the Products for resale.


In consideration for the mutual promises, covenants, and agreements made below, the parties, intending to be legally bound, agree as follows:


1. DEFINITIONS.


For purposes of this Agreement, the following terms will have the indicated definitions:


"AGREEMENT" as defined in the preamble, above.


"CONFIDENTIAL INFORMATION" as defined in Section 13.


"END-USER" means any person or entity that obtains the Products from Distributor.


"INTELLECTUAL PROPERTY RIGHTS" means the intangible legal rights or interests evidenced by or embodied in (1) any idea, design, concept, technique, technology, software, firmware, configuration files, drivers or hardware, invention, discovery, or improvement regardless of patentability, but including patents, patent applications, trade secrets and know-how, trade name, trademark, service mark, trade or business secret; (2) any work of authorship, regardless of copyrightability, but including copyrights and any moral rights recognized by law; and (3) any other similar rights, in each case on a worldwide basis.


"LOSS" shall mean any and all dues, penalties, fines, costs, amounts paid in settlement, liabilities, obligations, taxes, liens, losses, expenses and fees, including court costs and reasonable attorneys' fees and expenses arising out of any actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees or rulings.


"PRODUCTS" means the Thryistor and Schottky products developed and manufactured by the Supplier, as set forth on Exhibit A, attached.


"TERRITORY" means anywhere in the world.


Page 1 of 14 2
"DISTRIBUTOR PROJECT MANAGER" is defined as the NSC Director of Global Sales and Marketing, Mr. Graham Clark.


"SUPPLIER PROJECT MANAGER" is defined as the PSI Chief Executive Officer, Mr. John Rhee.


2. TERM


2.1 TERM. This Agreement shall be for a term of one year, commencing on the date first written above (the "Term"), and is renewable for successive one-year terms by mutual agreement.


2.2 CANCELLATION. This Agreement may be terminated by either party giving the other party at least sixty day's written notice.


2.3 CONTINUATION OR SURVIVAL OF CERTAIN SECTIONS. Certain sections, as indicated below, will survive and remain effective even after the termination of this Agreement. All other rights and obligations of each party to the other shall terminate upon the termination of this Agreement.


3. DISTRIBUTION RIGHTS.


3.1 EXCLUSIVITY


3.1.1 The Supplier hereby grants the Distributor a transferable, exclusive right and license to distribute the Products in the Territory during the Term.


3.1.2 The Distributor may resell or distribute the Products to any customer in the Territory without restriction.


3.2 PRODUCTS. The Supplier shall not sell any products with specifications comparable to those of the Products in the Territory The Supplier has a semiconductor product development program and as such will offer other products to the to the Distributor, who shall have first right of refusal to sell such newly developed products. Should the Distributor either refuse this offer or fail to commercialize the offered product within six month, then the Supplier can market these products through different marketing channels.


3.3 MANUFACTURING AGREEMENT. Distributor wishes to obtain manufacturing rights to Thyristor products and related technology and Sckottky products and related technology on a global basis, for which Supplier will obtain a royalty that will be commensurate with industry standard rates for similar technology licensing arrangements. Both Distributor and Supplier agree to negotiate in good faith toward such an agreement during the first six months of this Agreement.


3.4 DISTRIBUTOR'S DISCRETION TO MARKET AND SELL PRODUCTS. The Distributor may incorporate, combine, or integrate the Products and sell them either alone or in combination with other Products. All aspects of the distribution and marketing of the Products by the Distributor shall be in the Distributor's sole control, including without limitation the methods of marketing, pricing, and advertising, and the terms and conditions of any sale, unless and except as otherwise provided for in this Agreement. The Distributor may sell the Products to any person or entity.


Page 2 of 14 3 4. PURCHASE ORDERS; PACKAGING; SHIPPING.


4.1 PROCEDURES FOR PLACING ORDERS. Distributor will deliver to Supplier purchase orders that will specify the Product being purchased, quantity ordered, and the terms of payment, delivery and any other information that Supplier and Distributor may mutually negotiate with customers. Supplier and Distributor may mutually negotiate purchase orders from customers.


4.2 INVOICES. Upon fulfillment of a purchase order by Supplier, and delivery of the Products in accordance with the purchase order, Supplier will forward to Distributor a correct invoice for the Products delivered.


4.3 PACKAGING. The Supplier agrees to provide appropriate packaging, as agreed between the Distributor and Supplier, in order to permit the Products to be shipped directly to the customers or the Distributor's distribution system without reopening the boxes or otherwise re-handling the finished goods. The Distributor will distribute Products with all packaging, warranties, disclaimers, and end-user Agreements if any, intact as shipped by the Supplier.


4.4 DIRECT SHIPPING. The Distributor may request that the Supplier ship directly to any location designated by the Distributor. The Supplier agrees to comply with these requests at no additional charge other than transportation.


5. PRODUCT AVAILABILITY. Supplier represents and warrants that it has the capacity to produce and deliver processed silicon wafers in the following amounts:
Monthly Wafer Start Monthly Wafer Out Monthly Yield
Date Capability Capability Target
---- ---------- ---------- ------ May, 2001 500 June, 2001 1000 July, 2001 1000 500 85% August, 2001 1000 700 85% September, 2001 1000 1000 85% October, 2001 1000 1000 92% November, 2001 1250 1000 92% December, 2001 1250 1000 92% January, 2002 1500 1250 95% February, 2002 1500 1250 95% March, 2002 1500 1500 95% April, 2002 1500 1500 95% May, 2002 2000 1500 95%


5.1 Supplier will make up any deficiency in yield with additional product supplied FOC.


Page 3 of 14 4 6. PREPAYMENTS BY DISTRIBUTOR; PAYMENT BY DISTRIBUTOR .


6.1 PREPAYMENTS BY DISTRIBUTOR. Upon the execution of this agreement and the execution of a confirmed purchase order from a valid customer (as determined by Distributor) issued to Distributor for approximately 1000 wafers per month for a period of 12 months, Distributor will pay Supplier a prepayment toward the purchase of Products of $50,000 plus accrued interest which is represented by an existing note receivable from Supplier to Distributor and $95,000 in the form of a cashiers check and, subject to the other provisions of this Section 6.1, will continue to make continuing $95,000 monthly prepayments. These payments will be referred to as "PrePayments" and will be accrued as prepayments against any obligations by Distributor to make payments pursuant to Section 6.3 below. When the aggregate amount of payments to be made to Supplier pursuant to Section 6.3 below have exceeded the sum total of all PrePayments, this Section 6.1 will no longer apply and no further PrePayments will be made. The note receivable for $50,000 will be so that it is no longer in default, but instead in a current status that is payable on request by Distributor due, and this note receivable will be canceled when all Prepayments as well as the $50,000 of this note and accrued interest on the note have been paid to Distributor. Until such time, any and all payments due to Supplier pursuant to Section 6.1, will be retained by Distributor and applied against the then outstanding balance of PrePayments. On the date this Section 6.1 no longer applies, Supplier will pay Distributor a one-time PrePayment advance charge of one percent of the aggregate amount of PrePayments made.


6.2 CHANGES TO PREPAYMENT AMOUNT. Should the Supplier and Distributor agree that the monthly prepayments require to be altered due to a change in business conditions, then the prepayment amount or schedule can be revised, subject to the following guidelines:


6.2.1 Where increases to the prepayment amount are suggested due to increases in volume of production, such changes shall be approximately proportional to the change in direct variance cash expense to achieve the desired production increase. Variance cash expense increases shall include incremental direct labor and incremental direct materials.


6.2.2 Where changes are made for reasons other than increasing manufacturing volume, the Distributor and the Supplier agree that the Distributor Project Manager may authorize a monthly alteration in the prepayment, subject solely to his discretion.


6.3 PAYMENTS FOR PRODUCTS. Distributor will make payments to the Supplier for the Products supplied and delivered by Supplier equal to the collected accounts receivable for Product sales less


o 8% of such collections for processed wafers delivered
in the first 4 months of this Agreement; 10% for
deliveries in the subsequent 4 months; and 11%
thereafter on all products delivered to the named
Customer Protek Devices.


o 11% of collections on all other processed wafers over
$150 selling price.


o 17% of collections for Products encapsulated by or on
behalf of Supplier.


6.4 PAYMENT DATE. Payments will be made by the fifteenth day following the last day of the calendar month in which the Products were delivered, subject to the provisions of Section 6.1 above.


Page 4 of 14 5
6.5 DISTRIBUTOR PRICING. The Distributor is free to determine its own resale prices for the Products. Although the Supplier may suggest list prices, these are suggestions only and are not binding in any way. The Distributor will not use price to jeopardize the commercialization of the product.


6.6 DEMAND PAYMENT. Notwithstanding Section 6.1, Supplier will pay Distributor any then outstanding PrePayment amount that has not been offset by payments to be made by Distributor under Section 6.2, at any time reque ...